The Impact of Stock Index Future Trading on Volatility of Underlying Market-Chinese Stock Market

Abstract

Stock price index futures have long been viewed by experts and scholars as a risk-hedging trading tool that can help investors’ hedge risk and ensure the healthy and stable development of China's financial stock market. The asset underlying of stock price index futures is the stock price index. The CSI 300 stock index futures, a type of stock price index futures, were created on April 16, 2010, and its birth marked the official start of stock index futures trading in China. After the launch of CSI 300 stock index futures, the China Financial Futures Exchange launched (CFFEX) SSE 50 stock price index futures and CSI 500 stock price index futures one after another. The introduction of stock price index futures trading can bring about an impact on the volatility of the stock spot market to a certain extent and play a role in reducing volatility. The speed of transmission of stock index information to market participant decreases after the China Financial Futures Exchange restricts stock index futures trading. Based on the results that the coefficients of DF-DT, the cross term of the two dummy variables added to the GARCH model, have significant values and values less than zero, it can be analyzed that the restrictive measures taken by the China Financial Futures Exchange on stock index futures trading enhance the mitigating restrictive effect of the introduction of stock index futures trading in China on the volatility of the Chinese stock spot market.